Criticism of the world’s correspondent banking network continues to mount — and at the same time, the number of correspondent banking relationships is on the decline.
The Financial Stability Board released analysis last year that found SWIFT interbank payment messages reflected a 4.1 percent decline in correspondent banking activity in 2017. A look at Deutsche Bank offers the industry a glimpse into at least some of the forces behind this shift.
In February, Deutsche Bank said it significantly reduced its correspondent banking services following an investigation into the estimated $229 billion in suspected money laundering at Danske Bank’s Estonia branch. Correspondent banking exposes financial institutions to the risks of its correspondent banking partners, and with anti-money laundering regulations tightening, and the risk of cyberattacks on the financial services industry growing, banks are looking to limit their exposure.
But correspondent banking has had a long reputation for being a sluggish, opaque way to inefficiently move funds across borders, and despite its shortcomings, is often the only choice for payers, especially small- and medium-sized businesses (SMBs). This presents a conundrum in small business banking: Correspondent banking makes for an expensive, clunky cross-border transaction service for SMBs, but there are few alternatives as correspondent banking relationships decline.
Some service providers are looking to enhance the existing correspondent network, like SWIFT, which continues to press for ISO 20022 adoption, noting its potential to promote efficiency and availability of data for funds moves between financial institutions.
Others, like Ebury, are deploying FinTech solutions to move money through mechanisms beyond correspondent banking.
Mauro Miotto, head of Partnerships at Ebury, recently spoke with PYMNTS about the friction of the correspondent banking network and how it augments challenges that many banks face today in servicing their small business clients.
“The traditional correspondent banking network, as well as, in general, the banks’ push to reduce costs, has left [SMBs] in particular more exposed and less served when it comes to international trade,” he said, adding that this has been a challenge for SMBs for years.
And correspondent banking’s inefficiencies aren’t the only area in which traditional banks fall short when addressing SMBs’ global operation needs. Miotto noted that it can be difficult for financial institutions to absorb the risks associated with servicing SMBs and their cross-border needs, whether it be enabling those companies to send money or collect funds in a different currency, obtain data about a global transaction, or manage their foreign currency volatility risk exposure.
Further, he said, not only is the correspondent banking network an outdated strategy to move money across borders, but it relies on legacy infrastructure. This not only adds to the inefficiencies of cross-border transacting for SMBs, but also limits operability for the banks themselves. With many beginning to see that risks and process burdens are outweighing the benefits, banks will reduce their correspondent banking activity, further hampering their SMB services.
At a time when many SMBs struggle with delayed payments, expanding across borders can augment this cash flow crunch, said Miotto. From accepting a payment across border, to ensuring that transaction occurs in the correct currency, and then managing FX volatility, SMBs have emerged grossly underserved in the global banking market — making it all the more difficult for these businesses to begin trading globally.
Complicating matters, noted Miotto, is the fact that no two SMBs are exactly alike.
“Not all [SMBs] are born equal,” he said. “Some have a very good understanding of, and are properly managing, currency risk in efficient ways. Others are less aware of this.”
In addition to banks finding it unprofitable to augment cross-border payments and FX management services for SMBs, Miotto noted that these institutions similarly don’t see value in providing the kind of advisory and education services to SMBs to expand their understanding of the risks of operating across borders.
Traditional banks, thanks to deeply ingrained practices and decades-old infrastructure, can struggle to upgrade their systems and adopt technology that would make it more cost effective to service globally-trading SMBs. However, banks are a crucial component to moving money across borders, which is why Miotto emphasized the value in launching services to fill SMBs’ banking and education gaps, without necessarily competing with the bank directly.
Rather, collaborating with these financial institutions (FIs) enables FinTechs like Ebury to wield the most valuable components of the global banking system and deploy technology to bypass the less effective banking processes.
Ebury recently announced a collaboration with SACE SIMEST, the unit of Italian investment bank Cassa Depositi e Prestiti Group that connects global traders to financial and insurance solutions. The deal enables exporter business customers of SACE SIMEST connect to a range of digital services to mitigate their global risks offered by Ebury.
According to Miotto, collaborations like these demonstrate the value FinTechs can bring to traditional instiutions. By building a solution from the ground up, he said, FinTechs can operate more nimbly on the cloud, with infrastructure that is easily scalable and flexible to address changing and shifting demands and market conditions.
“We’re increasingly partnering with banks and other FIs, as opposed to being more of a challenger,” he said. “We see real value in collaborating with banks.”